Finances can be complicated to understand, but if you want to ensure you're living a financially healthy lifestyle, it's crucial to know whether you're making good long-term decisions. This is particularly true when it comes to managing debt.
The majority of Americans have at least one credit card. In fact, a Gallup poll found that only 29% of U.S. adults don't have any credit cards at all, while 7% of Americans have seven or more cards. And while credit cards can be healthy and help you achieve your financial goals, not understanding all their intricacies could lead to serious damage.
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One of the most important features to understand about credit cards is the interest rate. Credit cards have notoriously high interest rates (the average being nearly 18% per year), and those interest payments can quickly skyrocket. However, nearly a third (30%) of Americans who carry credit card debt don't know what they're paying in interest, according to a survey from U.S. News & World Report.
Why is that a problem? Because high-interest debt can be incredibly toxic to your finances, and if you don't know what you're paying in interest, you could be spending far more than you realize.
Why high-interest debt is so harmful
The more high-interest debt you have, the more your interest payments snowball over time. If you only pay the minimum payments for years, depending on how much debt you have and your interest rate, you may not make any progress at all. Rather, your total balance may continue to climb even when you're making consistent payments.
Even if you do pay off the debt eventually, your total interest payments could equal or even outweigh your initial balance. For example, say you have $10,000 in credit card debt with an interest rate of 18%. If you're making monthly payments of $200, it will take roughly eight years to pay that debt off completely -- and you'll end up paying a total of nearly $9,000 in interest alone.
If you're saddled with high-interest debt but are unaware of exactly how much you're paying, you could end up spending tens of thousands of dollars over the years just in interest payments. Furthermore, if you continue racking up debt as you're attempting to pay off current balance, you'll likely end up stuck in a vicious circle, unable to completely knock out your debt.
Fortunately, even if you're drowning in debt, there are ways to overcome this challenge -- and the first step is to simply arm yourself with as much knowledge as possible.